WEBVTT NOTE 15. The Scottish Enlightenment 1 00:00:00.000 --> 00:00:05.000 15. The Scottish Enlightenment 2 00:00:05.000 --> 00:00:15.000 The temptation is to entitle this chapter The Forerunners of Adam Smith, himself a leading product of the Scottish Enlightenment. 3 00:00:15.000 --> 00:00:28.000 The problem, however, is that Smith, in most aspects of economics, was a retrogression and deterioration rather than an advance from his notable predecessors. 4 00:00:28.000 --> 00:00:35.000 By the later seventeenth and during the eighteenth century, the once mighty Oxford and Cambridge universities, 5 00:00:35.000 --> 00:00:43.000 previously in the forefront of thought and scholarship, had deteriorated to being merely the playground of wealthy young men. 6 00:00:43.000 --> 00:00:52.000 Instead, for over a century, the intellectual leadership of Great Britain devolved on the two great universities of Scotland, 7 00:00:52.000 --> 00:00:57.000 the University of Glasgow and, particularly, the University of Edinburgh. 8 00:00:57.000 --> 00:01:05.300 1. The Founder, Gershom Carmichael 9 00:01:05.300 --> 00:01:11.460 The founder of the tradition of academic economics in Scotland was Gershom Carmichael, circa 10 00:01:11.460 --> 00:01:20.720 1672 to 1729. Carmichael's father was a Presbyterian minister who was exiled for heresy by the 11 00:01:20.720 --> 00:01:27.120 of the Scottish Presbyterian-run government. Born in England, Carmichael graduated from 12 00:01:27.120 --> 00:01:34.080 Edinburgh University. He then became regent at St. Andrews and Glasgow universities, where 13 00:01:34.080 --> 00:01:41.080 courses were taught by regents, who were essentially young graduate students. After that, Carmichael 14 00:01:41.080 --> 00:01:49.120 was Presbyterian minister at Fife. When the regenting system was abolished in 1727, Carmichael 15 00:01:49.120 --> 00:01:54.880 Paul was named the first professor of moral philosophy at Glasgow, where he died two years 16 00:01:54.880 --> 00:01:57.560 later. 17 00:01:57.560 --> 00:02:03.780 Economics or political economy was taught as a subset of a course in moral philosophy, 18 00:02:03.780 --> 00:02:09.440 and thus the analysis of trade and the economy was embedded in a groundwork and treatment 19 00:02:09.440 --> 00:02:11.800 of natural law. 20 00:02:11.800 --> 00:02:17.720 In many ways, the 18th century Scottish professors followed the post-medieval and late Spanish 21 00:02:17.720 --> 00:02:33.720 and the Irish Scholastic Method of including economic analysis as one segment of an integrated tome covering ethics, natural law, jurisprudence, ontology and theology, as well as economics proper. 22 00:02:33.720 --> 00:02:42.720 The term Protestant Scholastic has been coined for such writers as John Locke, and indeed the phrase is a coherent one, 23 00:02:42.720 --> 00:02:50.720 Since one does not have to be Catholic to use the rational scholastic method or arrive at scholastic conclusions. 24 00:02:50.720 --> 00:03:02.720 A fascinating example of this was perhaps the first Protestant scholastic, the Dutch jurist Hugo Grotius, 1583-1645. 25 00:03:02.720 --> 00:03:09.720 Grotius, who studied law at the University of Leiden and later became Chief Magistrate of Rotterdam, 26 00:03:09.720 --> 00:03:16.220 was an eminent natural law theorist who brought the concepts of natural law and natural rights 27 00:03:16.220 --> 00:03:19.220 to the Protestant countries of Northern Europe. 28 00:03:19.220 --> 00:03:28.720 In his outstanding work, which made him the founder of international law on the law of war and peace, 1625, 29 00:03:28.720 --> 00:03:34.720 Grotius clearly pushed natural law to its logical and rationalist conclusion. 30 00:03:34.720 --> 00:03:42.320 Even if God did not exist, natural law would still be eternal and absolute. 31 00:03:42.320 --> 00:03:48.760 Such law is discoverable by unaided human reason, and even God could not negate, even 32 00:03:48.760 --> 00:03:56.180 if he wanted to, such natural law insights as 2 plus 2 equals 4. 33 00:03:56.180 --> 00:04:03.880 Natural law required the rights of property to be secure in order to enjoy social cooperation, 34 00:04:03.880 --> 00:04:09.260 And under Grotius' influence, the idea of the rights of property became expanded to 35 00:04:09.260 --> 00:04:11.980 the economic sphere. 36 00:04:11.980 --> 00:04:17.900 In a prefigurement of 18th century natural law, natural rights theory, Grotius believed 37 00:04:17.900 --> 00:04:24.720 in the harmony of human interaction based on free action and property rights. 38 00:04:24.720 --> 00:04:30.680 Grotius had been able to work in the rationalist and natural law tradition because his mentor, 39 00:04:30.680 --> 00:04:37.700 Jacobus Arminius had previously broken off from orthodox Calvinism to stress the freedom 40 00:04:37.700 --> 00:04:40.900 of will of every individual. 41 00:04:40.900 --> 00:04:47.640 On these important matters of social philosophy, the Armenians had what might be called a neo-Catholic 42 00:04:47.640 --> 00:04:49.440 position. 43 00:04:49.440 --> 00:04:56.760 In politics, Grotius was a leader in the classical liberal, free-trade Republican Party in Holland, 44 00:04:56.760 --> 00:05:03.040 and then engaged in their century-long struggle with the monarchist orthodox Calvinists. 45 00:05:03.040 --> 00:05:09.360 Particularly influential on Northern European theorists was the late 16th century Spanish 46 00:05:09.360 --> 00:05:17.480 Jesuit scholastic Francisco Suarez. Suarez and his school heavily influenced two men 47 00:05:17.480 --> 00:05:23.880 who are generally considered founders of modern philosophy, the early 17th century Frenchman 48 00:05:23.880 --> 00:05:30.480 and René Descartes and the late 17th century German Gottfried Leibniz. 49 00:05:30.480 --> 00:05:37.000 Suarez's Metaphysical Disputations was his most influential work, published in Salamanca 50 00:05:37.000 --> 00:05:39.680 in 1597. 51 00:05:39.680 --> 00:05:45.840 Particularly important was the second edition, published in Mainz, Germany in 1600, which 52 00:05:45.840 --> 00:05:52.920 became the leading philosophy textbook in most European universities, both Catholic and Protestant, 53 00:05:52.920 --> 00:06:01.080 for over a century. Leibniz, indeed, referred to the disputations as the philosophia recepta, 54 00:06:01.080 --> 00:06:04.800 the received philosophy. 55 00:06:04.800 --> 00:06:11.960 Suarez's work was heavily influential in Protestant Central Europe, Bohemia, Germany and Holland. 56 00:06:11.960 --> 00:06:17.880 The University of Leiden, a leading academic center in Holland during the 17th century, 57 00:06:17.880 --> 00:06:24.780 was a particular focus of Suarezian dominance, and it was at Leiden that Hugo Grotius pursued 58 00:06:24.780 --> 00:06:27.260 his studies. 59 00:06:27.260 --> 00:06:32.800 Though Gershom Carmichael, who inaugurated the teaching of economics in Scotland, launched 60 00:06:32.800 --> 00:06:38.600 the tradition of reading and studying Grotius, a tradition that was followed by Adam Smith 61 00:06:38.600 --> 00:06:45.600 in the 18th century line of Scottish intellectual descent, more directly important for Carmichael 62 00:06:45.600 --> 00:06:55.840 was Grotius' best-known follower, Samuel Baron von Pufendorf, 1632 to 1694. Pufendorf was 63 00:06:55.840 --> 00:07:02.580 born in Saxony, son of a Lutheran pastor. He first studied theology and then shifted 64 00:07:02.580 --> 00:07:10.280 to mathematics, jurisprudence and natural law. Graduating from the University of Jena, 65 00:07:10.280 --> 00:07:17.120 Pufendorf went to Leiden, where he published his first work on jurisprudence in 1661. 66 00:07:17.120 --> 00:07:23.120 On the basis of this achievement, Carl Ludwig, the Elector Palatine, created for the young 67 00:07:23.120 --> 00:07:30.780 Pufendorf a chair of natural and international law at the University of Heidelberg. 68 00:07:30.780 --> 00:07:37.640 In 1672, while teaching at the University of Lund in Sweden, Pufendorf published his 69 00:07:37.640 --> 00:07:45.760 and his great work, De jure naturai et gentium. The following year he produced the De officio 70 00:07:45.760 --> 00:07:54.000 hominis et civis, a resume or abstract of his great De jure. It turned out, not surprisingly, 71 00:07:54.000 --> 00:08:00.700 that the more concise De officio proved more useful as a teaching tool, and therefore became 72 00:08:00.700 --> 00:08:08.300 and the far more directly influential, if inferior, product of Pufendorf's pen. 73 00:08:08.300 --> 00:08:14.260 Not only did Professor Gershom Carmichael bring the study of the new natural and international 74 00:08:14.260 --> 00:08:21.100 law teachings of Grotius and Pufendorf to British shores, but also he was himself the 75 00:08:21.100 --> 00:08:24.660 English translator of De Officio. 76 00:08:24.660 --> 00:08:31.420 Carmichael published the English translation in 1718, along with extensive notes and a 77 00:08:31.420 --> 00:08:34.200 supplementary commentary. 78 00:08:34.200 --> 00:08:39.620 This work turned out to be Carmichael's most important achievement, certainly in economics 79 00:08:39.620 --> 00:08:41.980 or the social sciences. 80 00:08:41.980 --> 00:08:48.460 Six years later, Carmichael published an improved second edition of De Officio, and this edition 81 00:08:48.460 --> 00:08:51.900 was reprinted in 1769. 82 00:08:51.900 --> 00:08:59.220 Carmichael saw to it that his students were steeped in Pufendorf and in his own commentaries. 83 00:08:59.220 --> 00:09:05.260 Carmichael was the first teacher in Scotland to expound Locke, Leibniz and Descartes as 84 00:09:05.260 --> 00:09:08.260 well as Grotius and Pufendorf. 85 00:09:08.260 --> 00:09:13.620 A knowledgeable observer has called Gershom Carmichael the true founder of the Scottish 86 00:09:13.620 --> 00:09:15.780 School of Philosophy. 87 00:09:15.780 --> 00:09:21.700 A contemporary noted that he was a very great reputation and was exceedingly valued both 88 00:09:21.700 --> 00:09:24.180 both at home and abroad. 89 00:09:24.180 --> 00:09:30.080 So much so, in fact, that another observer noted that on Mr Carmichael's death all the 90 00:09:30.080 --> 00:09:36.100 English students have left the University, and indeed it's very thin this winter, and 91 00:09:36.100 --> 00:09:40.260 his name and reputation brought many to it. 92 00:09:40.260 --> 00:09:45.860 Thus Carmichael led the way in the emerging custom of bright English students deserting 93 00:09:45.860 --> 00:09:52.540 at Oxbridge and Going Up to a Scottish University for Intellectual Attainment. 94 00:09:52.540 --> 00:09:58.740 On Carmichael's commentary on the De Officio, the testimony of Carmichael's most distinguished 95 00:09:58.740 --> 00:10:02.980 student, Francis Hutchison, is telling. 96 00:10:02.980 --> 00:10:09.180 Pufendorf's smaller work, De Officio Hominus et Civis, which that worthy and ingenious 97 00:10:09.180 --> 00:10:15.660 man the late Professor Gershom Carmichael of Glasgow, by far the best commentator on that 98 00:10:15.660 --> 00:10:23.660 Book has so supplied and corrected that the notes are of much more value than the text. 99 00:10:23.660 --> 00:10:30.660 Samuel von Pufendorf, like the 18th century French and Spanish scholastics, was a pre-Austrian 100 00:10:30.660 --> 00:10:34.340 subjective utility scarcity theorist. 101 00:10:34.340 --> 00:10:39.580 That is, he believed that the value of goods on the market was determined by their common 102 00:10:39.580 --> 00:10:45.780 Common Valuation Placed on Them by the Consumers, and that the more abundant the supply, the 103 00:10:45.780 --> 00:10:48.020 lower the value. 104 00:10:48.020 --> 00:10:50.140 Thus Pufendorf. 105 00:10:50.140 --> 00:10:57.180 Of common value the foundation is that aptitude of the good or service by which it helps directly 106 00:10:57.180 --> 00:11:01.000 or indirectly to meet human needs. 107 00:11:01.000 --> 00:11:07.100 Yet there are some things most useful for human life upon which no definite value is 108 00:11:07.100 --> 00:11:08.380 set. 109 00:11:08.380 --> 00:11:15.900 The necessity of the good or its great usefulness are so far from always being the first determinant 110 00:11:15.900 --> 00:11:22.580 that we can observe men putting a very low value on what is indispensable to human life. 111 00:11:22.580 --> 00:11:27.960 This is because nature gives us a plentiful supply of such goods. 112 00:11:27.960 --> 00:11:33.780 In fact, a high value proceeds from scarcity. 113 00:11:33.780 --> 00:11:40.340 In his notes to Pufendorf, Carmichael adds some valuable and not so valuable insights. 114 00:11:40.340 --> 00:11:46.180 He stresses the subjective nature of utility, pointing out that the usefulness of a good, 115 00:11:46.180 --> 00:11:51.380 which is essential to its value, may be either real or imagined. 116 00:11:51.380 --> 00:11:57.180 Unfortunately, he also muddied the waters by adding to scarcity as a determinant of 117 00:11:57.180 --> 00:12:04.700 of Value, The Difficulty of Acquiring Goods, An Obvious Real-Cost Attempt to Measure the 118 00:12:04.700 --> 00:12:09.980 Value of Goods by the Effort Put into Their Production. 119 00:12:09.980 --> 00:12:12.780 2. 120 00:12:12.780 --> 00:12:17.540 Francis Hutchison, Teacher of Adam Smith 121 00:12:17.540 --> 00:12:23.420 Carmichael's most prominent student and follower was his successor at the Chair of Moral Philosophy 122 00:12:23.420 --> 00:12:33.020 at Glasgow, Francis Hutchison, 1694-1746. Hutchison, too, was the son of a Presbyterian 123 00:12:33.020 --> 00:12:40.400 minister of Ulster Scottish or Scots-Irish Stock, who was born in Ireland. Educated in 124 00:12:40.400 --> 00:12:46.700 Glasgow and then Dublin, Hutchison succeeded to the moral philosophy chair at Glasgow in 125 00:12:46.700 --> 00:12:54.980 1730, upon the demise of Carmichael, where he taught until his death 16 years later. 126 00:12:54.980 --> 00:13:00.460 Hutchison brought to Scottish philosophy a solid belief in natural rights and the beneficence 127 00:13:00.460 --> 00:13:08.700 of nature. Hence, Hutchison brought to Scottish thought the basic classical liberal worldview. 128 00:13:08.700 --> 00:13:14.620 Francis Hutchison was a stimulating and dynamic lecturer who introduced the style of pacing 129 00:13:14.620 --> 00:13:22.900 The Never-to-be-forgotten Dr. Hutchison, as Adam Smith referred to him in a letter half 130 00:13:22.900 --> 00:13:29.580 a century later, was the first Glasgow professor to teach in English instead of Latin, and 131 00:13:29.580 --> 00:13:36.100 also the first to become friend, guardian and even banker to his students. His lectures 132 00:13:36.100 --> 00:13:43.340 on philosophy, politics, law, ethics and political economy drew students from all over Britain, 133 00:13:43.340 --> 00:13:50.720 The most famous of whom was Adam Smith, who studied under him from 1737 to 1740. 134 00:13:50.720 --> 00:13:58.300 Hutchison's major work, The System of Moral Philosophy, 1755, was published by his son 135 00:13:58.300 --> 00:14:01.220 after his death. 136 00:14:01.220 --> 00:14:07.060 Hutchison's treatment of value in his system is virtually identical to that of Pufendorf. 137 00:14:07.060 --> 00:14:12.660 Again, utility and scarcity are the determinants of value. 138 00:14:12.660 --> 00:14:18.420 Starting with the statement, when there is no demand, there is no price, Hutchison also 139 00:14:18.420 --> 00:14:25.220 points out that some highly useful things, such as air and water, have little or no value 140 00:14:25.220 --> 00:14:31.660 because of the bountiful supply furnished by nature. An increasingly scarce supply will 141 00:14:31.660 --> 00:14:38.980 raise the value or price of a good, a more abundant supply will lower them. Furthermore, 142 00:14:38.980 --> 00:14:45.300 Hutchison perceptively defines use highly subjectively, not simply as a good which 143 00:14:45.300 --> 00:14:52.940 naturally yields pleasure, but as any tendency to give any satisfaction by prevailing custom 144 00:14:52.940 --> 00:14:54.740 or fancy. 145 00:14:54.740 --> 00:15:01.500 Unfortunately, however, Hutchison also took the Carmichael confusion about real costs 146 00:15:01.500 --> 00:15:03.540 and escalated it. 147 00:15:03.540 --> 00:15:09.260 For Hutchison not only brought in the difficulty of labor as a determinant, he also made it 148 00:15:09.260 --> 00:15:16.260 even more determining where the demand for two sorts of goods is equal. 149 00:15:16.260 --> 00:15:21.500 Foreshadowing Adam Smith's famous analysis, Francis Hutchison stressed the importance 150 00:15:21.500 --> 00:15:26.600 of an advancing division of labor in economic growth. 151 00:15:26.600 --> 00:15:33.660 on the market involves reciprocal aid through mutually beneficial exchange, a prime example 152 00:15:33.660 --> 00:15:36.420 of the beneficence of nature. 153 00:15:36.420 --> 00:15:42.740 The division of labor is a key to the preservation of human life, and Hutchison shows the enormous 154 00:15:42.740 --> 00:15:49.720 advantages of specialization, skill and exchange over the puny productivity of an isolated 155 00:15:49.720 --> 00:15:57.600 Crusoe. Extended division of labor also connotes a more extensive communication of knowledge 156 00:15:57.600 --> 00:16:05.400 and permits greater use of machinery in production. In his analysis of money, Hutchison set forth 157 00:16:05.400 --> 00:16:11.640 an analysis of which commodities are likely to be chosen as money on the market that used 158 00:16:11.640 --> 00:16:17.280 to be standard in money and banking texts until governments destroyed the gold standard 159 00:16:17.280 --> 00:16:24.760 in the early 1930s. Money, Hutchison pointed out, is a commodity generally accepted in 160 00:16:24.760 --> 00:16:31.440 a particular country that becomes used as a general medium of exchange and as a common 161 00:16:31.440 --> 00:16:38.000 standard of value and measure for economic calculation. Commodities which are chosen 162 00:16:38.000 --> 00:16:44.440 as money on the market are those with the most moneyish qualities, already generally 163 00:16:44.440 --> 00:16:50.720 Very desirable and acceptable in exchange, divisible into small quantities without losing 164 00:16:50.720 --> 00:16:58.200 their pro-rata share of value, durable for long periods of time, and portable, for which 165 00:16:58.200 --> 00:17:02.680 quality they must have a high value per unit weight. 166 00:17:02.680 --> 00:17:08.320 Generally, he pointed out, silver and gold have been the two commodities that have been 167 00:17:08.320 --> 00:17:21.320 are chosen as by far the most suitable as money, with coins becoming the most popular form precisely for being divisible and easily carrying a warrant of purity. 168 00:17:21.320 --> 00:17:30.320 Debasement of coins increases their supply proportionately and raises prices of goods in terms of the money unit. 169 00:17:30.320 --> 00:17:36.320 As in the case of all other goods, an increase in the supply of gold or silver, Hutchison 170 00:17:36.320 --> 00:17:43.320 pointed out, lowers their value in terms of other goods, that is, increases their prices 171 00:17:43.320 --> 00:17:46.320 in terms of specie. 172 00:17:46.320 --> 00:17:51.080 Hutchison's most impressive achievement was his sharp rebuttal of the satiric Bernard 173 00:17:51.080 --> 00:18:00.680 de Mendeville, 1670-1733, whose enormously popular Fable of the Bees, or Private Vice's 174 00:18:00.680 --> 00:18:07.920 Public Benefits, was published in 1714 and expanded and reprinted in several editions 175 00:18:07.920 --> 00:18:10.840 over the next fifteen years. 176 00:18:10.840 --> 00:18:16.880 In a pre-physiocratic, proto-Keynesian piece of mischief, the fable maintained that the 177 00:18:16.880 --> 00:18:26.880 The Vice of Luxury, no matter how deplorable, performs the important economic function of maintaining the prosperity of the economy. 178 00:18:26.880 --> 00:18:34.880 Many historians, especially F. A. von Hayek, have held Mandeville to be a forerunner of Smithian laissez-faire, 179 00:18:34.880 --> 00:18:44.880 since Smith held that individual self-interest is harmonized with the interests of all through the operation of competition and the free market. 180 00:18:44.880 --> 00:19:01.880 But the intent and the analysis are very different, for Mandeville stressed the alleged paradox of private vice public benefits, and the benefit was to come through the pre-Keynesian mechanism of consumption spending. 181 00:19:01.880 --> 00:19:08.880 Mandeville, furthermore, did not in any sense draw laissez-faire conclusions from this analysis. 182 00:19:08.880 --> 00:19:16.720 On the contrary, in a letter to Dion, 1732, published shortly before his death, Mandeville 183 00:19:16.720 --> 00:19:22.320 insisted that not the free market, but the wisdom and dexterous management of a skillful 184 00:19:22.320 --> 00:19:29.560 politician are needed to transform private vices into public gain. 185 00:19:29.560 --> 00:19:34.440 Mandeville's work, furthermore, was virtually the living embodiment of what the 19th century 186 00:19:34.440 --> 00:19:42.200 Every French laissez-faire economist, Frederic Bastiat, would call the broken window fallacy. 187 00:19:42.200 --> 00:19:47.720 Mandeville not only defended the importance of luxury, but also of fraud as providing 188 00:19:47.720 --> 00:19:53.080 work for lawyers and theft for having the virtue of employing locksmiths. 189 00:19:53.080 --> 00:19:58.720 And then there was Mandeville's classically imbecilic defense in his Fable of the Bees 190 00:19:58.720 --> 00:20:02.000 of the Great Fire of London. 191 00:20:02.000 --> 00:20:05.080 The fire of London was a great calamity. 192 00:20:05.080 --> 00:20:11.560 But if the carpenters, bricklayers, smiths and all, not only that are employed in building, 193 00:20:11.560 --> 00:20:17.360 but likewise those that made and dealt in the same manufactures and other merchandises 194 00:20:17.360 --> 00:20:23.600 that were burnt, and other trades again that got by them when they were in full employed, 195 00:20:23.600 --> 00:20:30.200 were to vote against those who lost by the fire, the rejoicings would equal, if not exceed, 196 00:20:30.200 --> 00:20:39.720 The Complaints, Keynesianism Gone Mad, or rather, carried to its consistent conclusion. 197 00:20:39.720 --> 00:20:45.240 Mandeville's defense of the vice of luxury was enough to outrage both the rational economist 198 00:20:45.240 --> 00:20:48.800 and the Presbyterian in Francis Hutcheson. 199 00:20:48.800 --> 00:20:55.080 In rebuttal, in a prefigurement of Say's law, he pointed out that income not spent in one 200 00:20:55.080 --> 00:21:03.080 in one way will be spent in another, and if not wasted in luxury will be devoted to useful prudent purposes. 201 00:21:03.080 --> 00:21:09.080 Luxurious spending, then, is scarcely necessary for economic prosperity. 202 00:21:09.080 --> 00:21:17.080 In fact, he went on, it is the thrifty and the industrious who provide prosperity by supplying goods to the public. 203 00:21:17.080 --> 00:21:30.080 Declared Hutchison, the good arising to the public is in no way owing to the luxurious, intemperate or proud, but to the industrious, who must supply all customers. 204 00:21:30.080 --> 00:21:35.580 Ridiculing Mandeville, the ordinarily sober Hutchison reposted, 205 00:21:35.580 --> 00:21:42.080 Who needs to be surprised that luxury or pride are made necessary to public good, 206 00:21:42.080 --> 00:21:51.080 when even theft and robbery are supposed by the same author, Mandeville, to be subservient to it, by employing locksmiths? 207 00:21:51.080 --> 00:21:59.080 The money saved by not spending on luxury or locks would be profitably employed elsewhere, 208 00:21:59.080 --> 00:22:06.880 unless all other wants had been totally saturated, that is, unless all men be already so well 209 00:22:06.880 --> 00:22:13.240 provided with all sorts of convenient utensils that nothing can be added. 210 00:22:13.240 --> 00:22:19.600 As a general proposition, Hutcheson called for liberty and the natural right of property. 211 00:22:19.600 --> 00:22:25.680 As he put it in his system, each one has a natural right to exert his powers according 212 00:22:25.680 --> 00:22:31.880 according to his own judgment and inclination for those purposes in all such industry, labor, 213 00:22:31.880 --> 00:22:38.320 or amusements as are not harmful to others in their persons or goods, while no more public 214 00:22:38.320 --> 00:22:42.120 interest necessarily require his labors. 215 00:22:42.120 --> 00:22:46.040 This right we call natural liberty. 216 00:22:46.040 --> 00:22:51.960 An unexceptionable statement, except for the ominous vagueness in the concept of public 217 00:22:51.960 --> 00:23:00.880 Hutchison's devotion to laissez-faire, however, was limited and guarded. 218 00:23:00.880 --> 00:23:07.720 Thus, in his Introduction to Moral Philosophy, he opines that the populace often needs also 219 00:23:07.720 --> 00:23:14.440 to be taught and engaged by laws into the best methods of managing their own affairs 220 00:23:14.440 --> 00:23:17.980 and exercising their mechanic arts. 221 00:23:17.980 --> 00:23:24.500 In international trade, for example, Hutchison was mired in old-fashioned mercantilism, advocating 222 00:23:24.500 --> 00:23:31.460 state regulation to ensure a favorable balance of trade and high protective tariffs, as well 223 00:23:31.460 --> 00:23:36.860 as government subsidies of shipping to develop industry. 224 00:23:36.860 --> 00:23:41.620 Hutchison's devotion to natural rights was weakened still further by his being the first 225 00:23:41.620 --> 00:23:48.720 to adumbrate the chimerical and disastrous formula of utilitarianism, the greatest happiness 226 00:23:48.720 --> 00:23:54.740 for the greatest number, possibly after having acquired it or its equivalent from Gershom 227 00:23:54.740 --> 00:23:56.860 Carmichael. 228 00:23:56.860 --> 00:24:03.120 The specific influences of Hutchison on Adam Smith will be detailed further below. 229 00:24:03.120 --> 00:24:08.940 Suffice it to say here that the order of topics of Hutchison's lectures as published in the 230 00:24:08.940 --> 00:24:15.140 System, and as heard by Young Smith at the University of Glasgow, is almost the same 231 00:24:15.140 --> 00:24:19.940 as the Order of Chapters in the Wealth of Nations. 232 00:24:19.940 --> 00:24:22.340 3. 233 00:24:22.340 --> 00:24:26.880 The Scottish Enlightenment and Presbyterianism. 234 00:24:26.880 --> 00:24:32.020 The Enlightenment was a general movement in European thought in the 18th century that 235 00:24:32.020 --> 00:24:36.540 stressed the power of human reason to discern truth. 236 00:24:36.540 --> 00:24:41.460 Originally it was dedicated to natural law and natural rights, although in the later 237 00:24:41.460 --> 00:24:46.920 years of the century it began to shade off into utilitarianism. 238 00:24:46.920 --> 00:24:53.100 While scholasticism was compatible with an emphasis on natural law and natural rights, 239 00:24:53.100 --> 00:24:58.780 it was generally discarded and reviled as ignorant superstition along with revealed 240 00:24:58.780 --> 00:25:00.500 religion. 241 00:25:00.500 --> 00:25:06.360 In religion, therefore, Enlightenment thinkers tended to discard Christianity, attack the 242 00:25:06.360 --> 00:25:18.300 In this atmosphere, corrosive of Christian faith and values, it is remarkable that the 243 00:25:18.300 --> 00:25:23.900 Scottish Enlightenment was linked very closely with the Presbyterian Church. 244 00:25:23.900 --> 00:25:25.420 How did this happen? 245 00:25:25.420 --> 00:25:31.400 How did a Scottish kirk, which in the 16th century, under the aegis of John Knox, had 246 00:25:31.400 --> 00:25:37.800 had been fiery and militant, become softened into a church that welcomed the enlightenment, 247 00:25:37.800 --> 00:25:45.580 that is, natural law, reason, and latitudinarian, if not skeptical, Christianity. 248 00:25:45.580 --> 00:25:51.260 The answer is that in the two centuries since John Knox, the hard-nosed Calvinist faith 249 00:25:51.260 --> 00:25:53.800 had weakened in Scotland. 250 00:25:53.800 --> 00:26:00.800 In particular, after 1752, a powerful group of moderate Presbyterian clergy was able to 251 00:26:00.800 --> 00:26:06.920 to take over and dominate the Church of Scotland, the established Church, which, since the Union 252 00:26:06.920 --> 00:26:13.480 of Scotland and England in 1707, had been established by the British Crown, even though 253 00:26:13.480 --> 00:26:19.360 it was Presbyterian rather than Anglican, as was the Church of England. 254 00:26:19.360 --> 00:26:25.040 Bitterly opposed to the moderates were the evangelical party, that is, clergy true to 255 00:26:25.040 --> 00:26:27.800 the basic Calvinist faith. 256 00:26:27.800 --> 00:26:33.980 The well-connected and highly educated moderates, strong in the lowland areas of Edinburgh and 257 00:26:33.980 --> 00:26:40.700 Glasgow and on the east coast up to Aberdeen, were able to form the dominant power elite 258 00:26:40.700 --> 00:26:46.600 in the Church of Scotland after the 1750s, even though they represented a minority of 259 00:26:46.600 --> 00:26:49.120 the local Kirks. 260 00:26:49.120 --> 00:26:55.660 The moderates, embodying a soft and latitudinarian theological outlook, were intimately connected 261 00:26:55.660 --> 00:27:02.140 with the Edinburgh and Glasgow intellectuals who constituted the Scottish Enlightenment. 262 00:27:02.140 --> 00:27:06.940 Most of their tactics were planned in meetings in Edinburgh taverns. 263 00:27:06.940 --> 00:27:14.900 The dominant figure among the moderates was the Rev. William Robertson, 1721-1793, an 264 00:27:14.900 --> 00:27:20.860 incessant talker and indefatigable organizer who led the moderates since their formation 265 00:27:20.860 --> 00:27:27.500 in 1752, and who became the moderator, or head, of the General Assembly of the Church 266 00:27:27.500 --> 00:27:32.780 of Scotland from 1766 to 1780. 267 00:27:32.780 --> 00:27:38.980 In 1762, furthermore, Robertson became the principal of the University of Edinburgh, 268 00:27:38.980 --> 00:27:44.380 and it was his leadership and administration that vaulted Edinburgh into the front ranks 269 00:27:44.380 --> 00:27:47.540 of European universities. 270 00:27:47.540 --> 00:27:52.500 Robertson was also the founder and leading light of various learned societies, which 271 00:27:52.500 --> 00:27:58.380 brought together weekly for papers, discussion and socializing the leading figures of the 272 00:27:58.380 --> 00:28:04.120 Scottish Enlightenment, including university professors, lawyers and the major figures 273 00:28:04.120 --> 00:28:06.820 of the moderate clergy. 274 00:28:06.820 --> 00:28:13.060 Thus Robertson founded the Select Society of Edinburgh in 1750. 275 00:28:13.060 --> 00:28:19.660 During the 1750s, the select society met weekly and included in its ranks such university 276 00:28:19.660 --> 00:28:27.060 figures as Robertson, David Hume, Adam Ferguson and Adam Smith, classical liberal lawyers 277 00:28:27.060 --> 00:28:34.080 such as Henry Hume, Lord Kames, and Alexander Wedderburn, later Lord Chancellor of Great 278 00:28:34.080 --> 00:28:41.900 Britain, and such youthful but prominent moderate clergy as Robertson, Alexander Jupiter Carlisle, 279 00:28:41.900 --> 00:28:47.580 Robert Wallace, Hugh Blair, John Hume and John Jardine. 280 00:28:47.580 --> 00:28:53.380 Carlyle was a charismatic figure as well as a heavy drinker, as many moderate clergymen 281 00:28:53.380 --> 00:28:55.780 were in that era. 282 00:28:55.780 --> 00:29:02.660 Wallace was in charge of Church of Scotland patronage as well as being royal chaplain. 283 00:29:02.660 --> 00:29:08.620 Wallace in his private papers favored illicit sex almost to the point of promiscuity, quickly 284 00:29:08.620 --> 00:29:12.740 A Warning that the activity would have to be kept hidden. 285 00:29:12.740 --> 00:29:18.160 Blair, in addition to his duties in the clergy, was professor of rhetoric at the University 286 00:29:18.160 --> 00:29:19.700 of Edinburgh. 287 00:29:19.700 --> 00:29:26.260 Jardine was a shrewd politician whose daughter married the son of Lord Cames, who in turn 288 00:29:26.260 --> 00:29:28.980 was a cousin of David Hume. 289 00:29:28.980 --> 00:29:36.140 John Hume was a moderate clergyman and secretary to Lord Bute, close friend of David Hume and 290 00:29:36.140 --> 00:29:41.980 and a playwright, an activity which in itself was a matter of deep suspicion to the dour 291 00:29:41.980 --> 00:29:44.780 fundamentalist evangelical clergy. 292 00:29:44.780 --> 00:29:52.740 Thus, Hume wrote a play, Douglas, in 1756, which was put on with many top leaders of 293 00:29:52.740 --> 00:29:58.660 the moderate Enlightenment acting in the play, including the Reverend Robertson, Alexander 294 00:29:58.660 --> 00:30:05.820 Carlyle, David Hume, Hugh Blair and the Reverend Adam Ferguson, professor of moral philosophy 295 00:30:05.820 --> 00:30:08.740 at the University of Edinburgh. 296 00:30:08.740 --> 00:30:14.980 The lax views of the moderates were under constant attack from the evangelical forces. 297 00:30:14.980 --> 00:30:20.920 Particular targets were Lord Keynes and especially the philosopher David Hume, who was almost 298 00:30:20.920 --> 00:30:26.880 excommunicated for heresy by the General Assembly of the Church of Scotland, but was saved 299 00:30:26.880 --> 00:30:30.460 by his powerful moderate friends. 300 00:30:30.460 --> 00:30:36.640 and his moderate university connections, however, could not gain for Hume any post in a Scottish 301 00:30:36.640 --> 00:30:42.900 university, so great was the enmity of the Presbyterian evangelicals. 302 00:30:42.900 --> 00:30:47.380 It should be noted that one of the key leaders of the moderate party was none other than 303 00:30:47.380 --> 00:30:49.500 Francis Hutchison. 304 00:30:49.500 --> 00:30:55.540 Thus the Enlightenment intellectuals, philosophers and economists of 18th century Scotland were 305 00:30:55.540 --> 00:31:03.540 are intimately connected with the fortunes and the institutions of the establishment moderate wing of the Church of Scotland. 306 00:31:04.540 --> 00:31:13.540 Hutchison, Hume and Smith then, while scarcely orthodox Calvinists, were dedicated Presbyterians according to their own lights, 307 00:31:13.540 --> 00:31:23.540 and hence their rationalism and theological laxity were nevertheless infused from time to time with hard-nosed Presbyterian values. 308 00:31:25.540 --> 00:31:32.540 4. David Hume and the Theory of Money 309 00:31:32.540 --> 00:31:41.260 David Hume, 1711-1776, the famous Scottish philosopher, was a close friend of Adam Smith, 310 00:31:41.260 --> 00:31:48.440 who was named Smith's executor, an acquaintance of Turgot and the French adherents of laissez-faire, 311 00:31:48.440 --> 00:31:54.140 and member of the moderate elite of the Scottish Enlightenment. Born in Edinburgh, the son of 312 00:31:54.140 --> 00:32:00.080 of a Scottish Lord, Hume studied on the continent, where he published his epical philosophical 313 00:32:00.080 --> 00:32:07.660 work A Treatise of Human Nature, 1739 and 1740, at the age of 28. 314 00:32:07.660 --> 00:32:14.260 Hume's treatise was pivotal in its corrosive and destructive skepticism, managing unfairly 315 00:32:14.260 --> 00:32:20.280 to discredit the philosophy of natural law, to create an artificial split between fact 316 00:32:20.280 --> 00:32:28.160 and Value, and therefore to cripple the concept of natural rights on behalf of utilitarianism, 317 00:32:28.160 --> 00:32:35.060 and indeed to undermine the entire classical realist analysis of cause and effect. 318 00:32:35.060 --> 00:32:40.780 There is no figure more important in the unfortunate discrediting of the classical philosophical 319 00:32:40.780 --> 00:32:47.760 tradition of natural law realism, a tradition that had lasted from Plato and Aristotle at 320 00:32:47.760 --> 00:32:54.840 at least through Aquinas and the late scholastics. In a sense, Hume completed the corrosive effect 321 00:32:54.840 --> 00:33:01.100 of the 17th century French philosopher René Descartes' influential view that only the 322 00:33:01.100 --> 00:33:08.240 precisely mathematical and analytic could provide certain knowledge. Hume's skeptical 323 00:33:08.240 --> 00:33:14.360 and shaky empiricism was the other side of the Cartesian coin. 324 00:33:14.360 --> 00:33:20.120 While highly influential in later decades, Hume's treatise was ignored in his own day, 325 00:33:20.120 --> 00:33:26.320 and after writing it, he turned to brief essays on political and economic topics, and eventually 326 00:33:26.320 --> 00:33:32.520 to his then-famous multi-volume History of England, which he presented from a Tory point 327 00:33:32.520 --> 00:33:34.240 of view. 328 00:33:34.240 --> 00:33:40.760 Barred from academia for his skepticism and alleged irreligion, Hume joined the diplomatic 329 00:33:40.760 --> 00:33:47.160 Corps and served as Secretary to Lord Hertford, the British Ambassador to France. 330 00:33:47.160 --> 00:33:55.120 In 1765, Hume became the British Chargé d'affaires in Paris and two years later rose to the post 331 00:33:55.120 --> 00:33:57.760 of Under-Secretary of State. 332 00:33:57.760 --> 00:34:03.680 Finally, in 1769, Hume retired to Edinburgh. 333 00:34:03.680 --> 00:34:10.320 Hume's contribution to economics is fragmentary and consists of approximately 100 pages of 334 00:34:10.320 --> 00:34:15.820 of Essays in his Political Discourses, 1752. 335 00:34:15.820 --> 00:34:21.400 The essays are distinguished for their lucid and even sparkling style, a style that shone 336 00:34:21.400 --> 00:34:26.640 in comparison to his learned but plotting contemporaries. 337 00:34:26.640 --> 00:34:32.280 Hume's most important contribution is his elucidation of monetary theory, in particular 338 00:34:32.280 --> 00:34:39.600 his clear exposition of the price-specie-flow mechanism that equilibrates national balances 339 00:34:39.600 --> 00:34:43.720 of Payments and International Price Levels. 340 00:34:43.720 --> 00:34:50.440 In monetary theory proper, Hume vivifies the Lockean quantity theory of money with a marvelous 341 00:34:50.440 --> 00:34:55.560 illustration, highlighting the fact that it doesn't matter what the quantity of money 342 00:34:55.560 --> 00:34:58.740 may be in any given country. 343 00:34:58.740 --> 00:35:06.680 Any quantity, smaller or larger, will suffice to do money's work of facilitating exchange. 344 00:35:06.680 --> 00:35:13.800 Boehm pointed up this important truth by postulating what would happen if every individual overnight 345 00:35:13.800 --> 00:35:19.960 should find the stock of money in his possession to have doubled miraculously. 346 00:35:19.960 --> 00:35:25.920 For suppose that, by miracle, every man in Great Britain should have five pounds slipped 347 00:35:25.920 --> 00:35:28.840 into his pocket in one night. 348 00:35:28.840 --> 00:35:34.000 This would much more than double the whole money that is at present in the kingdom. 349 00:35:34.000 --> 00:35:40.000 That there would not next day, nor for some time, be any more lenders, nor any variation 350 00:35:40.000 --> 00:35:42.680 in the interest. 351 00:35:42.680 --> 00:35:50.040 Prices then, following Locke's quantity theory of money, will increase proportionately. 352 00:35:50.040 --> 00:35:56.680 The price-specie flow mechanism is the quantity theory extrapolated into the case of many 353 00:35:56.680 --> 00:35:58.340 countries. 354 00:35:58.340 --> 00:36:04.500 The rise in the supply of money in country A will cause its prices to rise. 355 00:36:04.500 --> 00:36:11.460 But then the goods of country A are no longer as competitive compared to other countries. 356 00:36:11.460 --> 00:36:16.580 Exports will therefore decline, and imports from other countries with cheaper goods will 357 00:36:16.580 --> 00:36:18.020 rise. 358 00:36:18.020 --> 00:36:25.000 The balance of trade in country A will therefore become unfavorable, and specie will flow out 359 00:36:25.000 --> 00:36:28.600 of A in order to pay for the deficit. 360 00:36:28.600 --> 00:36:33.880 But this outflow of specie will eventually cause a sharp contraction of the supply of 361 00:36:33.880 --> 00:36:42.120 money in country A, a proportional fall in prices and an end to, indeed, a reversal of 362 00:36:42.120 --> 00:36:44.680 the unfavorable balance. 363 00:36:44.680 --> 00:36:51.480 As prices in A fall back to previous levels, specie will flow back in until the balance 364 00:36:51.480 --> 00:36:57.520 Balance of trade is in balance, and until the price levels in terms of species are equal 365 00:36:57.520 --> 00:36:59.200 in each country. 366 00:36:59.200 --> 00:37:05.880 Thus, on the free market, there is a rapidly self-correcting force at work that equilibrates 367 00:37:05.880 --> 00:37:11.800 balances of payments and price levels and prevents an inflation from going very far 368 00:37:11.800 --> 00:37:15.160 in any given country. 369 00:37:15.160 --> 00:37:21.000 While Hume's discussion is lucid and engaging, it is a considerable deterioration from that 370 00:37:21.000 --> 00:37:22.560 of Richard Cantillon. 371 00:37:22.560 --> 00:37:30.560 First, Cantillon did not believe in aggregate proportionality of money and price level changes, 372 00:37:30.560 --> 00:37:37.280 instead engaging in a sophisticated microprocess analysis of money going from one person to 373 00:37:37.280 --> 00:37:38.960 the next. 374 00:37:38.960 --> 00:37:46.320 As a result, money and prices will not rise proportionately even in the eventual new equilibrium 375 00:37:46.320 --> 00:37:47.320 state. 376 00:37:47.320 --> 00:37:55.160 Second, Cantillon included the income effect of more money in a country, whereas Hume confined 377 00:37:55.160 --> 00:37:58.800 himself to the aggregate price effect. 378 00:37:58.800 --> 00:38:04.960 In short, if the money supply in country A increases, it will equilibrate not only by 379 00:38:04.960 --> 00:38:12.240 prices rising in A, but also by the fact that monetary assets and incomes are higher in 380 00:38:12.240 --> 00:38:17.360 Section A, and therefore more money will be spent on imports. 381 00:38:17.360 --> 00:38:24.240 This income, or more precisely the cash balance effect, will generally work faster than the 382 00:38:24.240 --> 00:38:26.720 price effect. 383 00:38:26.720 --> 00:38:32.240 There are more problems with Hume's analysis, problems other than the omission of previously 384 00:38:32.240 --> 00:38:34.400 discovered truths. 385 00:38:34.400 --> 00:38:40.360 For while Hume conceded that it does not matter for production or prosperity what the level 386 00:38:40.360 --> 00:38:48.400 of the Money Supply may be, he did lay great importance on changes in that supply. 387 00:38:48.400 --> 00:38:54.440 Now it is true that changes do have important consequences, some of which Cartillon had 388 00:38:54.440 --> 00:38:56.520 already analyzed. 389 00:38:56.520 --> 00:39:02.800 But the crucial point is that all such changes are disruptive and distort market activity 390 00:39:02.800 --> 00:39:06.020 and the allocation of resources. 391 00:39:06.020 --> 00:39:13.120 David Hume, on the contrary, in a pre-Keynesian fashion, hailed the allegedly vivifying effects 392 00:39:13.120 --> 00:39:19.200 of increases in the quantity of money upon prosperity, and called upon the government 393 00:39:19.200 --> 00:39:25.960 to make sure that the supply of money is always at least moderately increasing. 394 00:39:25.960 --> 00:39:31.820 The two contradictory prescriptions of Hume for the supply of money are actually presented 395 00:39:31.820 --> 00:39:35.660 in two successive sentences. 396 00:39:35.660 --> 00:39:41.460 From the whole of this reasoning we may conclude that it is of no manner of consequence with 397 00:39:41.460 --> 00:39:49.020 regard to the domestic happiness of a state, whether money be in a greater or less quantity. 398 00:39:49.020 --> 00:39:56.780 The good policy of the magistrate consists only in keeping it, if possible, still increasing, 399 00:39:56.780 --> 00:40:02.940 because by that means he keeps alive a spirit of industry in the nation. 400 00:40:02.940 --> 00:40:08.880 Hume goes on, in proto-Keynesian fashion, to claim that the invigorating effect of increasing 401 00:40:08.880 --> 00:40:16.220 the supply of money occurs because employment of labor and other resources increases long 402 00:40:16.220 --> 00:40:19.780 before prices begin to rise. 403 00:40:19.780 --> 00:40:25.660 But Hume stops, as Keynes did, just as the problem becomes interesting. 404 00:40:25.660 --> 00:40:32.700 For then it must be asked, why were resources underemployed before, and what is there about 405 00:40:32.700 --> 00:40:37.940 about an increase in the money supply that might add to their employment. 406 00:40:37.940 --> 00:40:44.140 As W. H. Hutt was to point out in the 1930s, deeper reflection would show that the only 407 00:40:44.140 --> 00:40:51.020 possible reason for unwanted unemployment of resources is if the resource owner demands 408 00:40:51.020 --> 00:40:59.060 too high a price or wage for its use, and more money could only reduce such unemployment 409 00:40:59.060 --> 00:41:06.420 when selling prices rise before wages or the price of resources, so that workers or other 410 00:41:06.420 --> 00:41:14.500 resource owners are fooled into working for a lower real, though not lower money, wage. 411 00:41:14.500 --> 00:41:21.280 Furthermore, why should idle resources, as Hume implicitly postulates, reappear after 412 00:41:21.280 --> 00:41:28.560 the effects of new money have been fully digested in the economy in the form of higher prices? 413 00:41:28.560 --> 00:41:34.720 The answer can only be that after the price increases are accomplished and a new equilibrium 414 00:41:34.720 --> 00:41:41.360 attained, wages and other resource prices have caught up, and the money illusion has 415 00:41:41.360 --> 00:41:43.520 evaporated. 416 00:41:43.520 --> 00:41:50.320 Real resource prices return to being excessively high for the full employment of resources. 417 00:41:50.320 --> 00:41:56.680 Hume's inner contradictions on the quantity of money and inflation permeate his meager 418 00:41:56.680 --> 00:42:02.500 and other writings on economics. On the one hand, continuing inflation over the centuries 419 00:42:02.500 --> 00:42:09.500 is depicted as bringing about economic growth. On the other, Hume sternly favored ultra-hard 420 00:42:09.500 --> 00:42:16.020 money in relation to the banking system. Thus Hume delivered a hard-hitting attack on the 421 00:42:16.020 --> 00:42:23.440 unproductive and inflationary nature of the very existence of fractional reserve banking. 422 00:42:23.440 --> 00:42:29.920 He wrote of, Those institutions of banks, funds and paper credit, with which we are 423 00:42:29.920 --> 00:42:37.440 in the kingdom so much infatuated, these render paper equivalent to money, circulate it throughout 424 00:42:37.440 --> 00:42:43.540 the whole State, make it supply the place of gold and silver, raise proportionately 425 00:42:43.540 --> 00:42:50.220 the price of labor and commodities, and by that means either banish a great part of those 426 00:42:50.220 --> 00:42:54.740 as Precious Metals, or prevent their further increase. 427 00:42:54.740 --> 00:42:59.260 What can be more short-sighted than our reasoning on this head? 428 00:42:59.260 --> 00:43:05.260 We fancy, because an individual would be much richer were his stock of money doubled, that 429 00:43:05.260 --> 00:43:10.980 the same good effect would follow were the money of everyone increased, not considering 430 00:43:10.980 --> 00:43:17.940 that this would raise as much the price of every commodity, and reduce every man in time 431 00:43:17.940 --> 00:43:20.580 to the same condition as before. 432 00:43:20.580 --> 00:43:27.140 Elsewhere, Hume noted that inconveniences result from the increase of genuine money 433 00:43:27.140 --> 00:43:33.980 – specie – but at least they are compensated by the advantages which we reap from the possession 434 00:43:33.980 --> 00:43:41.340 of these precious metals, including bargaining power in negotiations with other nations. 435 00:43:41.340 --> 00:43:47.380 That he added, there appears no reason for increasing that inconvenience by a counterfeit 436 00:43:47.380 --> 00:43:53.580 money, which foreigners will not accept of in any payment, and which any great disorder 437 00:43:53.580 --> 00:43:56.800 in the State will reduce to nothing. 438 00:43:56.800 --> 00:44:04.220 To endeavor to increase paper credit artificially, then, merely increases money beyond its natural 439 00:44:04.220 --> 00:44:11.380 Proportion to Labor and Commodities, thereby increasing their prices. 440 00:44:11.380 --> 00:44:18.340 Hume concluded his penetrating analysis with an ultra-hard money policy proposal, one hundred 441 00:44:18.340 --> 00:44:21.940 percent specie reserve banking. 442 00:44:21.940 --> 00:44:28.620 It must be allowed that no bank could be more advantageous than such a loan as locked up 443 00:44:28.620 --> 00:44:47.980 Another important flaw in Hume's analysis of money was his propensity, picked up and 444 00:44:47.980 --> 00:44:55.620 magnified by Smith, Ricardo and the classical school, for leaping from one long-run equilibrium 445 00:44:55.620 --> 00:45:01.900 from State to Another without bothering about the dynamic process through time by which 446 00:45:01.900 --> 00:45:07.140 the real world actually moves from one state to another. 447 00:45:07.140 --> 00:45:14.380 It is this brusque neglect or comparative statics that leads Hume to omit the cationian 448 00:45:14.380 --> 00:45:21.620 analysis of microchanges in cash balances and income, and that causes him to neglect 449 00:45:21.620 --> 00:45:29.020 Income Effects in the Price-Specie Flow Mechanism of International Monetary Adjustment. 450 00:45:29.020 --> 00:45:36.100 Ironically, by doing so, and thereby neglecting the distribution effects of changing assets 451 00:45:36.100 --> 00:45:43.100 and incomes during the process, Hume, as well as countless other economists following him, 452 00:45:43.100 --> 00:45:50.380 distorts what happens in equilibrium itself, for they then cannot see that the new equilibrium 453 00:45:50.380 --> 00:45:52.780 will be very different from the old. 454 00:45:52.780 --> 00:45:58.540 Thus, when the money supply changes, there will not be an equiproportionate increase 455 00:45:58.540 --> 00:46:02.460 in all prices across the board. 456 00:46:02.460 --> 00:46:06.140 Professor Salerno puts the point very well. 457 00:46:06.140 --> 00:46:12.300 There is some truth to Cain's statement that Hume began the practice amongst economists 458 00:46:12.300 --> 00:46:18.180 of stressing the importance of the equilibrium position as compared with the ever-shifting 459 00:46:18.180 --> 00:46:20.980 and Transition towards it. 460 00:46:20.980 --> 00:46:27.300 For in reading Hume, one gets an unmistakable whiff, if not the full flavor, of the notion 461 00:46:27.300 --> 00:46:34.140 that it is in the states of long-run equilibrium that the economy actually resides most of 462 00:46:34.140 --> 00:46:35.760 the time. 463 00:46:35.760 --> 00:46:42.180 The transition between these states, Hume conceives as proceeding rapidly and terminating 464 00:46:42.180 --> 00:46:48.580 before another change in the economic data can intervene and propel the economy toward 465 00:46:48.580 --> 00:46:50.980 a new equilibrium. 466 00:46:50.980 --> 00:46:57.760 This notion at times leads Hume to truncate a full step-by-step analysis of a given change 467 00:46:57.760 --> 00:47:04.420 in the data, thus sliding or skipping over altogether its short-run effects in order 468 00:47:04.420 --> 00:47:11.400 to focus upon a comparative static analysis of its ultimate consequences. 469 00:47:11.400 --> 00:47:17.440 In reality, as the Austrians have emphasized, the situation is precisely the reverse of 470 00:47:17.440 --> 00:47:24.080 the Hume-British classical assumptions. Rather than the long-run equilibrium state being 471 00:47:24.080 --> 00:47:31.840 the fundamental reality, it never exists at all. Long-run equilibrium provides the tendency 472 00:47:31.840 --> 00:47:38.040 towards which the market is ever moving, but is never reached, because the underlying data 473 00:47:38.040 --> 00:47:45.960 of Supply and Demand, and therefore the ultimate equilibrium point, are always changing. 474 00:47:45.960 --> 00:47:52.880 Hence a full step-by-step analysis of a given change in the data is precisely what is needed 475 00:47:52.880 --> 00:47:59.680 to explain the process of successive short-run states which tend towards but never reach 476 00:47:59.680 --> 00:48:01.760 equilibrium. 477 00:48:01.760 --> 00:48:09.760 In the real world, the long run is not equilibrium at all, but a series of such short-run states, 478 00:48:09.760 --> 00:48:15.960 which will keep changing direction as underlying data are altered. 479 00:48:15.960 --> 00:48:22.240 A final problem with Hume's monetary views is that in contrast to the French laissez-faire 480 00:48:22.240 --> 00:48:28.600 school, he believed that money need not be a useful marketable commodity, but was a mere 481 00:48:28.600 --> 00:48:30.680 convention. 482 00:48:30.680 --> 00:48:39.600 According to Abbé André Morelle, 1727-1819, a disciple of Gournay and life-long friend 483 00:48:39.600 --> 00:48:46.200 of Turgot, Hume opines that money functions as such because of the belief that others 484 00:48:46.200 --> 00:48:48.120 would accept it. 485 00:48:48.120 --> 00:48:49.400 Very true. 486 00:48:49.400 --> 00:48:54.420 But this does not mean that money originated as a mere convention. 487 00:48:54.420 --> 00:49:00.660 And Hume acknowledges that money should be made of materials which have intrinsic value, 488 00:49:00.660 --> 00:49:06.620 or otherwise it would be multiplied without end and would sink to nothing. 489 00:49:06.620 --> 00:49:12.500 Hume's thoughts on interest are illuminating if only in contrast to the profundity and brilliance 490 00:49:12.500 --> 00:49:16.580 of Turgot's exposition twenty years later. 491 00:49:16.580 --> 00:49:23.340 Since money's impact is ultimately on prices only, Hume shows that interest can only be 492 00:49:23.340 --> 00:49:27.400 a phenomenon of real capital rather than of money. 493 00:49:27.400 --> 00:49:33.020 He discusses the relation between interest rates and profit rates, that is, the fundamental 494 00:49:33.020 --> 00:49:36.160 rates of return on investment. 495 00:49:36.160 --> 00:49:41.960 Here he points out correctly that no man will accept of low profits where he can have high 496 00:49:41.960 --> 00:49:48.540 interest, and no man will accept of low interest where he can have high profits. 497 00:49:48.540 --> 00:49:54.120 In short, interest and profit rates tend to be equal on the market. 498 00:49:54.120 --> 00:50:07.040 Hume characteristically abandons the search for cause and says that both arise from an 499 00:50:07.040 --> 00:50:11.440 extensive commerce and mutually forward each other. 500 00:50:11.440 --> 00:50:17.540 Boehm-Bawerk is surely right when he says that this view is somewhat superficial. 501 00:50:17.540 --> 00:50:24.260 But more than that, it is incorrect and reverses cause and effect, by stating that extensive 502 00:50:24.260 --> 00:50:31.900 commerce, by producing large stocks, capital, diminishes both interest and profits. 503 00:50:31.900 --> 00:50:38.320 For there is no reason why larger stocks of capital should lower interest or profit rates. 504 00:50:38.320 --> 00:50:44.140 What they do lower is the prices of capital goods and consumer goods. 505 00:50:44.140 --> 00:50:47.620 The causal chain is the other way round. 506 00:50:47.620 --> 00:50:53.320 Lower time preference rates, which usually but not always attend higher standards of 507 00:50:53.320 --> 00:51:00.500 living and greater prosperity, will cause both capital to accumulate and profit and 508 00:51:00.500 --> 00:51:03.060 interest rates to fall. 509 00:51:03.060 --> 00:51:08.340 The two, as the Austrian School would later point out, are different sides of the same 510 00:51:08.340 --> 00:51:10.660 coin. 511 00:51:10.660 --> 00:51:15.580 According to the other areas of economics, it is possible that some of the deep flaws 512 00:51:15.580 --> 00:51:21.080 in Adam Smith's value theory were the result of David Hume's influence. 513 00:51:21.080 --> 00:51:28.180 For Hume had no systematic theory of value and had no idea whatever of utility as a determinant 514 00:51:28.180 --> 00:51:29.800 of value. 515 00:51:29.800 --> 00:51:35.980 If anything, he kept stressing that labor was the source of all value. 516 00:51:35.980 --> 00:51:42.620 In political economy, David Hume may be considered a free trader and opponent of mercantilism. 517 00:51:42.620 --> 00:51:49.700 A friend and mentor of Adam Smith from their first meeting in 1752, Hume came to know the 518 00:51:49.700 --> 00:51:56.740 French laissez-faire during his years in that country, and Turgot himself translated Hume's 519 00:51:56.740 --> 00:51:59.740 and its Political Discourses into French.